Clearinghouses are third party financial institutions that provide clearing and settlement services for financial, derivatives, and securities transactions between two parties. Often the parties utilize a clearinghouse when they do not have a prior relationship or have not developed a level of trust that each party will uphold the terms of the transaction. A clearinghouse, as a third party, provides security and enforcement services for transactions that ensure that each party will perform as required under the transaction. For example, the clearinghouse will often receive collateral from each party prior to clearing the transaction that may be utilized in the event of a default on the transaction by either party.
The trust level between two parties can vary from fully trusted to fully un-trusted. Parties that fully trust each other often will settle transactions directly without the use of a third-party intermediary such as a clearinghouse. On the other hand, parties that do not trust each other or do not have prior experience with each other will often utilize the services provided by a clearinghouse to ensure that the transaction will be enforced or in the event of a default by one of the parties that the other party will not be harmed.
Existing solutions are focused on efficient inter-institution transfers with a single trusted authority such as a clearinghouse. Since all of transactions are settled through the clearinghouse, additional communications and transmissions may be necessary thus making it inefficient and expensive for the financial institutions.